Steven Gitlin – Vice President-Investor Relations Wahid Nawabi – President and Chief Executive Officer Raymond Cook – Senior Vice President and Chief Financial Officer.

Josephine Millward – Benchmark Company Austin Bohlig – Piper Jaffray Howard Rubel – Jefferies Jon Ladewig – Stifel.

Good day ladies and gentlemen and welcome to the AeroVironment Incorporated Second Quarter Fiscal 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after management’s remarks. As a reminder, this conference is being recorded for replay purposes.

With us today from the Company is the President and Chief Executive Officer, Mr. Wahid Nawabi; Senior Vice President and Chief Financial Officer, Mr. Raymond Cook; and Vice President of Investor Relations, Mr. Steven Gitlin. And now at this time, I would like to turn the conference over to Mr. Gitlin. Please go ahead, sir..

Thank you Andrew and welcome to our second quarter fiscal 2017 earnings call. Please note that on this call, certain information presented contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words such as believe, anticipate, expect, estimate, intend, project, plan, or words or phrases with similar meaning.

Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control, that may cause our business, strategy or actual results to differ materially from the forward-looking statements.

Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, reliance on sales to the U.S. government; availability of U.S.

government funding for defense procurement and R&D programs; changes in the timing and/or amount of government spending; risks related to our international business including compliance with export control laws, potential need for changes in our long-term strategy in response to future developments; the extensive regulatory requirements governing our contracts with the U.S.

Government and international customers, the consequences to our financial position, business and reputation that could result from failing to comply with such regulatory requirements, unexpected technical and marketing difficulties inherent in major research and product development efforts; changes in the supply and/or demand and/or prices for our products and services; the activities of competitors and increased competition; failure of the markets in which we operate to grow; failure to remain a market innovator and create new market opportunities; changes in significant operating expenses, including components and raw materials; failure to develop new products; product liability, infringement and other claims; changes in the regulatory environment; and general economic and business conditions in the United States and elsewhere in the world.

For a further list and description of such risks and uncertainties, see the reports we file with the Securities and Exchange Commission. The content of this conference call contains time sensitive information that is accurate only as of today, December 06, 2016.

The Company undertakes no obligation to make any revision to the statements contained in our remarks or to update them to reflect the events or circumstances occurring after this conference call. We will now begin with remarks from Wahid Nawabi.

Wahid?.

Thanks Steve and good afternoon. Our three main messages today are as follows; first we are on track for our stated fiscal 2017 plans and objectives.

Second, strong order flow during the second quarter supports our plans for the reminder of fiscal 2017; and third, we are making significant progress on our key strategic milestones designed to drive long term value creation.

On today’s call, I will review our second quarter financial performance and then provide an update on our fiscal 2017 milestones and objectives. Raymond Cook will then provide a detailed financial review before I discuss our reaffirmed outlook for the year. Following our prepared remarks, Raymond, Steve, and I will take your questions.

Now a quick summary of second quarter financial performance. As we expected, we made great progress on our bookings plan during the quarter increasing funded backlog by 60% sequentially to $119.6 million.

Second quarter revenue of $50.1 million produced total first half revenue of $86.3 million, which represents 32% of the midpoint of our guidance range. Last quarter, we noted that we expected the first half to represent slightly less than one third of full year revenue, and that is precisely the result we achieved.

Profitability was lower than the prior year. As anticipated and outlined last quarter, the decline was due primarily to two factors. First, the second quarter of fiscal 2016 included a $3.5 million reserve reversal for the settlement of prior year government incurred cost audits.

Second, this fiscal year’s increased sustaining engineering costs, which consist of activities associated with supporting our existing products are included in our cost of sales. These increased costs, combined with the lower sales volume reduced year-over-year gross margin in this second quarter.

The net result of lower year-over-year revenue and lower gross margin was a loss per share of $0.18. Our strong funded backlog in the quarter demonstrates continued demand for our solutions and improves our visibility for the full year to about 77% as Raymond will detail shortly.

Now let’s review our progress in the second quarter by reviewing our main milestones for the year. In the domestic defense market, AeroVironment’s small UAS remains the front line solution for American troops to acquire situational awareness whenever and wherever they need it.

This results in the Pentagon’s procurement and regular use of thousands of AeroVironment systems. Most U.S. military services now possess the quantity of first generation small UAS they believe they need to successfully execute their missions. However, the U.S. Navy is at a very early stage of small UAS adoption.

The Navy has procured and deployed Puma systems on their coastal patrol craft, which number more than a dozen. In August, we announced that a Navy destroyer had deployed with our Puma AE shipboard Precision Landing System. This demonstrates another step towards the adoption of Puma systems on the Navy’s more than 60 guided missile destroyers.

We continue to work collaboratively toward increased naval adoption of Puma AE and our Precision Landing System.

In addition to new systems sales, we continue to provide spare parts to our domestic defense customers to support our large installed base of small UAS and we look forward to new procurement opportunities with the Army including the Soldier Borne Sensors program.

We recently received an order for 30 of our Snipe Unmanned Aircraft Systems for early evaluation. Our position in the domestic defense market remains strong. The international market for our small UAS continues to expand, and we continue to identify opportunities to grow our business with existing customers and win new customers.

The international market is about a decade behind the U.S. DoD and small UAS adoption. We are seeing a similar adoption pattern emerging from a number of international customers as compared to the U.S.

DoD, and that initial procurement tend to be smaller in size and subsequent procurements grow as customers adopt and deploy our small UAS more broadly across their defense organizations. Our position as the leading supplier to the U.S. DoD generates international interest as customers recognize the unique value our solutions offer.

In addition to our uniquely valuable family of systems, we offer a differentiated customer support solution with comprehensive spares, training, and logistics services. This is particularly important to our international customers as we see their very high ops tempo translating into heavy and continuous use of our UAS.

We have now grown our international UAS footprint to include more than 35 allied nations in an expanding geographic scope that spans from Europe to the Middle East to Central Asia and to Australia.

For example in September, we announced the teaming relationship with our Australian partner XTEK, and with Sentient and GD Mediaware to pursue small UAS opportunities with the Australian army and Special Forces.

In October, we announced that the Netherlands had awarded us a $10.3 million contract for Raven digital upgrades, Puma AE, and Wasp AE systems becoming a full family of systems customer having first purchased Raven systems in 2008.

Strong international demand from allied nations remains a clear and ongoing opportunity for us consistent with our message throughout last and this fiscal year. The Army’s Frequency Relocation project for small UAS remains a key fiscal 2017 objective for us.

The Army very recently released its request for proposal for this project and we intend to submit our proposal. We look forward to providing you more information when we’re able to. Our tactical missile systems business continues to grow at a healthy pace.

For the first half of fiscal 2017, tactical missile systems order have tripled and TMS revenue has nearly doubled compared to the same period last year. We have once again created an entirely new market that we now lead.

Within our tactical missile systems portfolio, we now have a growing family of systems with four product variants either in production or moving toward production. Three of our fiscal 2017 objectives relate to continued progress with PMS; mainly Switchblade, Blackwing, and our other Switchblade variants.

It is important to note that in the case of our TMS solution, we typically co-invest in the development of these products alongside customer funded R&D. Our investments in TMS are paying off. We achieved a key milestone for Switchblade when we announced a new $22.8 million contract for the Army for Block 10C system in October.

In addition to other improvements the Block 10C version incorporates our digital data link improving the security of communications and enabling operations of a larger number of Switchblade in a geographic area.

The government funded this order through a Joint Urgent Operational Needs Statement or JUONS which requires high level of DoD support for approval. We are committed to continuous innovation as evident by a recently introduced multi-pack launcher for Switchblade.

The multi-pack launcher allows troops and forward operating bases to remain in protective structures while they launch and control Switchblade rounds remotely. Another positive indication of strong customer demand for LMAM appeared in the DoD overseas contingency operations budget amendment published in November.

This amendment included a $46.5 million increase in funding for replenishment and fielding of LMAMs. This is another key objective that we anticipated look toward and are making solid progress on.

Beyond LMAMs an additional $226.7 million of funding appeared in this budget amendment for counter-unmanned aerial systems or Counter-UAS development, testing, integration, procurement and fielding. Counter-UAS is a high priority area in which we are continuously engaged with customers at high levels and offer compelling capabilities.

We’re making great progress with our multiple Switchblade variants moving toward a family of Tactical Missile Systems that can address an expanding market of opportunities. One of our TMS variants Blackwing continues to generate interest within the U.S. Navy for procurement and deployment on submarines.

Blackwing gives submarine commanders the ability to see far beyond periscope line-of-sight. And in September, we announced a successful demonstration of Blackwing’s ability to link manned submarine with unmanned underwater vehicles and manned surface vessels to establish cross domain command, control and communication.

This exploitation of Blackwing’s valuable vantage point and its digital data link represents yet another important capability or enabling for submarines in naval fleets. Let’s shift now to our commercial initiatives and progress. We have received many requests for more details on our commercial market developments.

Having unveiled our solution in mid-November, we can finally discuss this opportunity in greater detail and share our excitement. We officially unveiled what we believe is the first and only end to end commercial drone information solution to a strong positive reception.

This compelling solution the result of our investments in hardware, software and systems includes a revolutionary drone and integrated sensor suite, a data analytics platform and turnkey services.

During our extensive work with early adopters in agriculture and other industries over the past several years, we learned a great deal about what these customers need to help them succeed. Like our military customers before them commercial customers need real-time access to specific information in order to make better decisions.

They know that a solution that delivers this information has to be reliable, easy-to-use and effective. In other words, it needs to operate in the harsh environment that farmers, energy companies and many others deal with day in and day out.

Many of these enterprise customers have already tried hobby drones and realized quickly toys are not designed for the real world environment in which they operate. AeroVironment is a uniquely capable of developing and delivering this type of solution to commercial customers.

Drones that operate easily, reliably and safely in harsh environments, the customers we work with realized that drone-based solutions simply have to work because the business will depend on it. We designed our commercial information solution specifically for these types of customers.

The new Quantix drone is a hybrid vertical takeoff and landing and horizontal flight system with integrated RGB and multispectral sensors.

The reason we selected this hybrid configuration is because it enables Quantix to be incredibly easy-to-use to takeoff and land gently in a single location and to collect high resolution color and multispectral imagery for more than 400 acres in a 45 minute flight.

What’s more customers can view imagery immediately after the Quantix drone completes its mission in lands.

Our AV decision support system or DSS in just the data collected by Quantix than processes it in the cloud providing a number of analytics and data products which further help customers gain a better understanding of their crops or infrastructure.

All of this through a robust and secure web platform, we think Quantix and AV DSS could revolutionize crop imaging in agriculture and infrastructure serving in multiple other industries, the way our small UAS revolutionize the battlefield.

We will begin taking preorders early in 2017 and intend to start shipping product in spring at which point we will be able to provide an update on the markets reception. For now we have seen a surge of interest in our commercial solution and believe it can help an entirely new set of AeroVironment customers proceed with certainty.

Moving to our EES business, global automakers continue to view AeroVironment as the premier residential charging provider in the industry and I’m proud to cite two important recent achievements.

First, today we announced that General Motors selected our charging system as the official residential charging solution for its highly anticipated Chevy Bolt EV. General Motors will include our charger at optional or dealer sold equipment and will incorporate the cost of the charger into the vehicles lease.

Second a major European automaker has selected AeroVironment for a sole source multi-year contract to design, develop and deliver residential chargers for distribution with their plug-in vehicles globally.

This represents our first significant expansion into European and Chinese markets and we plan to begin delivering products fully qualified for local requirements of these markets in mid-2017.

Nine global auto OEMs have now chosen AeroVironment for home charging solution reflecting the confidence automakers place and the safety, reliability and effectiveness of our EV charging products. In total, we have now deployed more than 40,000 Level 2 chargers.

We’re also seeing increased interest in our EV test systems after a several years of low demand. We believe this reflects a global increase in electric vehicle battery pack investments and development activity. Virtually every Asian and North American firm engaged in large scale battery pack development relies on AeroVironment test systems.

And EV charging, EV test and industrial EV charging, EES remains very well positioned to facilitate the broad and global transition to electric propulsion technology. Now Raymond will discuss second quarter financial results.

Raymond?.

Thank you, Wahid and good afternoon everyone. AeroVironment’s fiscal 2017 second quarter results are as follows. Revenue for Q2 was $50.1 million, a decrease of $14.6 million or 23% for the second quarter of fiscal 2016 revenue of $64.7 million.

The decrease in revenue resulted from a decrease in product sales of $20.1 million, partially offset by an increase in contract service revenue of $5.5 million. Looking at revenue by segment, UAS revenue was $40.8 million, a decrease of $15.8 million from the second quarter of fiscal 2016 revenue of $56.6 million.

The decrease was primarily due to a decrease in product deliveries of $21.5 million, partially offset by an increase in customer funded R&D work of $4.3 million and an increase in service revenue of $1.4 million. EES revenue was $9.3 million, an increase of $1.1 million from the second quarter of fiscal 2016 revenue of $8.1 million.

This increase was primarily due to an increase in product deliveries of our passenger fleet, electric vehicle charging systems. Gross margin for the second quarter was $17.4 million or 35%, as compared to $31.5 million or 49% for the second quarter of fiscal 2016.

The decrease in gross margin was primarily due to a decrease in product sales margin of $14.5 million, partially offset by an increase in service margins of $0.4 million, both of which were impacted by the reserve reversal of $3.5 million for the settlement of prior year government incurred costs audits recorded in the second quarter of fiscal 2016.

A decrease in product sales volumes which resulted in increase in the per unit fixed manufacturing engineering overhead support costs and an increase in sustaining engineering activities in support of our existing products of $1.3 million.

By segment, UAS gross margin decreased to $14.9 million for the second quarter of fiscal 2017 from $20.3 million.

As a percentage of revenue, gross margin for UAS decreased from 50% to 36%, primarily due to the reserve reversal on settlement of prior year government incurred costs audits and the increase in sustaining engineering costs in support of our existing products.

EES gross margin decreased $0.7 million to $2.5 million for the second quarter of fiscal 2017, primarily due to the reserve reversal on settlement of prior year government incurred costs audits and the increase in sustaining engineering costs in support of our existing products, partially offset by increased sales volume.

SG&A expense for the second quarter of fiscal 2017 was $13.4 million or 27% of revenue, compared to SG&A expense of $14.7 million or 23% of revenue for the second quarter of fiscal 2016. SG&A expense decreased $1.3 million, primarily due to decreases in bid and proposal costs.

R&D expense for the second quarter of fiscal 2017 was $8.5 million or 17% of revenue, compared to R&D expense of $9.9 million or 15% of revenue for the second quarter of fiscal 2016.

The operating loss for the second quarter of fiscal 2017 was $4.5 million or 9% of revenue compared to operating income of $6.9 million or 11% of revenue for the second quarter of fiscal 2016.

Our effective income tax rate was 1.1% for the second quarter of fiscal 2017, this compared to an effective income tax rate of 36.7% for the second quarter of fiscal 2016.

The variance from statutory rates for the three months ended October 29, 2016 was primarily due to federal legislation, permanently reinstating the federal research and development tax credit during the three months ended January 30, 2016.

And the reversal of a reserve uncertain tax positions due to settlement of prior fiscal year audits recorded in the first quarter of fiscal 2017 which result in a decrease in our estimated FY 2017 annual effective tax rate.

The net loss for the second quarter of fiscal 2017 was $4.2 million or an $0.18 loss per diluted share, compared to net income of $4.4 million or $0.19 earnings per share for the three months ended October 31, 2015.

Earnings per share for the second quarter of fiscal 2016 increased by $0.9 due to the reserve reversal on settlement of incurred cost claims. Now moving through our first half of fiscal 2017 results.

Revenue for the first half of fiscal 2017 was $86.3 million, a decrease of $25.4 million as compared to $111.8 million for the six months ended October 31, 2015. The decrease in revenue was due to a decrease in product deliveries of $31 million, partially offset by an increase in contract service revenue of $5.6 million.

UAS revenue decreased $25.4 million to $71.3 million for the first half of fiscal 2017, primarily due to a decrease in product deliveries of $31.3 million, partially offset by an increase in service revenue of $3.4 million and an increase in customer funded R&D work of $2.5 million.

EES revenue was $15 million for the first half of fiscal 2017 and the first half of fiscal 2016. Gross margin for the first half of fiscal 2017 was $24.1 million as compared to $47.6 million for the first half of fiscal 2016.

The decrease was primarily due to a decrease in product margins of $23.9 million, partially offset by an increase in service margins of $0.4 million. UAS gross margin decreased to $20.3 million for the first half of fiscal 2017, from $42 million.

As a percentage of revenue, gross margin for UAS decrease from 43% to 28% primarily due to reversal with settlement of prior year government incurred cost audits, and increase in sustaining engineering costs in support of our existing products and an increase in warranty related costs.

EES gross margin decreased to $1.8 million to $3.8 million for the first half of fiscal 2017, primarily due to the reserve reversal for the settlement of prior year government incurred cost audits and an increase in sustaining engineering costs in support of our existing products.

SG&A expense for the first half of fiscal 2017 was $27.1 million, or 31% of revenue, compared to SG&A expense of $30 million or 27% of revenue for the first half of fiscal 2016.

R&D expense for the first half of fiscal 2017 was $17.1 million or 20% of revenue, compared to R&D expense of $19.7 million or 18% of revenue for the first half of fiscal 2016.

The operating loss for the first half of fiscal 2017 was $20.1 million or 23% of revenue, compared to the operating loss of $2.2 million or 2% of revenue for the first half of fiscal 2016.

The effective income tax benefit rate for the first six months ended October 2016 was 19.8%, compared to the effective income tax benefit rate for the six months ended October 31, 2015 of 39.7%.

The net loss for the first half of fiscal 2017 was $15.8 million or $0.69 loss per share, compared to a net loss of $2.6 million or an $0.11 loss per share for the first six months ended October 31, 2015.

Our funded backlog as of October 2016 was $119.6 million, an increase of $22.4 million from the second quarter of fiscal year 2016 and an increase of $44.9 million from the first quarter of fiscal 2017.

Turning to our balance sheet, cash, cash equivalents and investments at the end of the second quarter of fiscal 2017, totaled $249.6 million, a decrease of $7.6 million from the prior quarter. The decrease in cash, cash equivalents and investments was driven by higher working capital requirements of the business.

Accounts receivable, including unbilled and retention receivables at the end of the second quarter of fiscal 2017 totalled $43 million, a decrease of $4.1 million from the prior quarter. Net inventory, at the end of the second quarter of fiscal 2017 was $55.2 million, compared to $44.1 million at the end of the prior quarter.

The increase in net inventory was primarily attributable to an increase in raw materials, work in progress and finished goods inventory for anticipated second half shipments.

Turning to capital expenditures, in the second quarter of fiscal 2017, we invested approximately $1.9 million or 4% of revenue in property improvements and capital equipment and recognized $1.7 million of depreciation and amortization expense. Now to an update of our FY’17 visibility.

As of today we have year-to-date revenues of $86 million, Q2 ending backlog that we expect to execute in FY’17 of an additional $108 million. Q3 quarter-to-date bookings that we anticipate execute in FY’17 of an additional $8 million.

We have no unfunded backlog from incrementally funded contracts that we anticipate to recognize revenue during the balance of the year. And revenues needed to hold EES revenues flat relative to last year of $5 million. This adds up to $207 million or 77% at the midpoint of our revenue guidance.

Now I’d like to turn things back to Wahid to discuss AV’s expectations for the remainder of FY’17..

Thanks Raymond. Before addressing our reaffirmed outlook for the full year, I would like to frame the opportunity set within our core domestic defense market. The U.S.

Army, Marine Corps, Special Forces and Air Force, have largely procured their initial [indiscernible] record requirements for Raven, Puma AE and Wasp AE first generation small UAS solutions. And require ongoing support with spare parts and upgrades.

The Navy, other marine operators and the Department of Homeland Security, represent large new domestic procurement and support opportunities for those first generation small UAS. The DoDs frequency location represents a significant upgrade opportunity across all DoD customers, who currently own and operate AeroVironment small UAS. The U.S.

Army’s Soldier Borne Sensors program represents a potential large, new procurement opportunity for a second generation small UAS that is almost pocketable in size and function.

We are positioned extremely well to benefit from all of these opportunities by selling more first generation small UAS along with upgrades spares and services and by developing the second generation capabilities that will further expand the benefits of small UAS to our customers. Now I would like to provide our view on the balance of the year.

Our visibility for fiscal 2017 is consistent with our fiscal 2017 plans and expectations. Based on our current outlook we continue to expect full year revenue of $260 million to $280 million with EPS of between $0.20 and $0.35.

As we have been communicating since our fourth quarter fiscal 2016 call, seasonality is having a greater impact on the distribution of revenue this year than in previous years.

Due to this year’s pronounced seasonality, we believe it’s important to provide you a preview of anticipated third quarter financial performance, which we expected to be roughly in line with the quarter just completed. We anticipate third quarter revenue between $50 million and $52 million with loss per share between $0.34 and $0.38.

This also implies very high fourth quarter revenue and profit, which we have expected all along. Our team is focused on effectively executing our plan in order to produce the results we expect.

We have been planning for the seasonality back-end loaded year since the beginning of this year and including increasing inventory levels in order to support our customers’ lead times and sense of urgency. We believe we’re prepared to deliver.

To summarize today’s three main points, first, we’re on track for our stated fiscal 2017 plans and objectives. Second, strong order flow during the second quarter supports our plan for the remainder of fiscal 2017. And third, we’re making significant progress on our key strategic milestones designed to drive long-term value creation.

Thank you for your continued support of AeroVironment and thanks to our amazing employees whose commitment to our customers every single day helps them proceed with certainty. Now we will take your questions..

[Operator Instructions] Please standby for questions. And we’ll be taking our first question from the line of Josephine Millward from the Benchmark Company. Your line is open..

Good afternoon..

Good afternoon, Josephine..

Thanks for taking my question. Great bookings in Q2.

Can you give us more color on your bookings since you only announced two orders during the quarter were they mostly international?.

Hi, Josephine, this is Wahid..

Hi, Wahid..

Hi there.

Our orders on any given quarter as you know in any given year varies significantly from customer geographies and products, and this year, we have so far seen as we stated from the beginning of the year, and I have explained that at the beginning of the fiscal year strong demand for our small UAS products domestically – I’m sorry internationally as well as our Tactical Missile Systems business for the family of systems and the variants of the products that we’ve developed.

So we see strong positions in the U.S.

market, and we have now grown our international customers for small UAS to 35 plus countries, and that list we expect it to grow even further as the years go by, so in general the bookings what we have is composed of a variety of different customers, both domestic and international, both small UAS as well as TMS product lines..

Okay, the urgent request for the Switchblade, the $47 million, do you expect to receive and ship that order in your fiscal year 2017, is that reflected in your guidance?.

I’m sorry Josephine, you said that, what was the question was it $47 million..

The urgent request for the Switchblade..

Yes..

Do you expect to receive that order and ship it in your fiscal year 2017 and it’s now reflected in your guidance..

Okay. So Josephine, first just a little point of clarification, the roughly $47 million that you mentioned and I mentioned in my remarks is not an urgent need designated request, it’s actually in the OCO budget of the government, in an amendment..

Right, right, yes..

So it may turn out to be executed by the government as an urgent need or may not, we don’t know that at this point, and we can’t comment on that specifically. However, as we can tell from our inventory positions and our backlog, we have been planning for these particular opportunities all year along and even before the year.

And I’m not in a position to be able to precisely predict the timing of these orders, but we remain prepared and we’re heavily and strongly engaged with customers in all these procurement activities..

Thank you..

Thank you..

Thank you. Our next question comes from the line of Austin Bohlig from Piper Jaffray. Your line is open..

Thanks for taking my questions, gentlemen. And just a couple of questions here. First I just kind of want to dig more into your guidance commercial opportunity.

And now with your commercial platform launch, just wondering if you could give a little bit more color on sizing this opportunity for you maybe as a percentage of revenues of how big you guys think you could get down the line..

Hello, Austin. Sure no problem this is Wahid. So we are extremely excited about the commercial information solution and the opportunity in front of us.

We have tried to stay away from sizing the market ourselves because it seems like there are so many other experts in the industry domestically as well as internationally and globally that size this market in many, many different ways.

It’s suffice to say that the overall size of the market is definitely in the billion of dollars over a long period of time, whichever way and whatever specific research report or analysis that you look at, they all project similar type of very large numbers, number one.

Number two, we believe that what’s really important now is to get the right solution that addresses the key problems and needs of our customers in the commercial industrial space effectively better than anyone else in a very differentiated and cost effective manner.

And we believe that our comprehensive solution that we just unveiled inclusive of our Quantix drone, the integrated payload and sensors within it, the software analytics that we offer as part of our DSS system and the services to operate and conduct these activity for our customers is one of the most comprehensive and highly differentiated solutions in the industry.

And we believe that we will uniquely position to take advantage of the opportunity in front of us. Right now we’re primarily focused on getting this product to market in terms of a shipping date that we expect and first customer ship, and as well as to receive pre-orders for them.

And so until and unless we get the product to the market and receive some indicators from the customers, I won’t be in a position to comment on the revenues and size of the market in the future, but at the time, we’ll be able to provide you some more clarity..

Okay. Well and then on top of that, a good transition I was just wondering about your distribution strategy or your go-to-market strategy with your commercial platform.

Do you guys plan on going straight direct or is it possible that you guys could team up with leading industrial players such as like John Deere or any of these bigger industrial players similar to what your competitors have done..

Sure, so Austin, as you know I’ve spend a great deal of my career in the commercial space and I’m quite familiar and many others in our company that we have sort of built the team who has extensive experience in multiple channel distribution strategies and different experiences in those markets.

We realized that there’s not a one-size-fits-all channel strategy for this business for all the verticals that are out there. We also recognize that selling hand to hand to every single farmer across the globe is not the most optimal solution and strategy for the agricultural market, for example.

However, so we’re looking and we’re developing a multi-channel strategy and for different industries it most likely will include different types of channel strategies.

Many of the large enterprise customers, and the utilities, and oil and gas and transportation they are smaller in number but very large in size in terms of the opportunity and their assets.

So that could bode well for a direct channel strategy, because they also expect to do the business direct with the suppliers and vendors and that’s very similar to our defense business.

So a lot of what we’ve done in the defense space bodes very well with those enterprise class customers that we’re engaged with actively and we have been working for many years now.

On other applications and global opportunity we will most likely deploy a multi-channel strategy which we will most likely face and we’ll give you more update as we get prepared and ready to do so. But right now, we’re really focused on execution and we’re excited about the opportunity..

Okay. Well, thank you, gentlemen. Good luck in the second half..

Thank you very much Austin..

Thank you. [Operator Instructions] We have a question from the line of Howard Rubel from Jefferies. Your line is open..

Thank you. Two, first when you had indicated the year was going to be back half loaded had you expected it to be really jammed into the fourth quarter..

Hi, Howard this is Wahid, the short answer is yes, we – as you know I’ve been here for five years and folks who have been here for lot longer than five years, there’s one thing very true about our business which is its very difficult to predict it on a quarterly basis and I believe for that same reason was one of the reasons why we’ve haven’t guided quarterly in many previous years before us.

And whenever we could provide some color we have been able to provide it confidently we’ve done so. So when we set our plans beginning of this fiscal year and even prior to the beginning of the fiscal year, we had a fairly good understanding of what our revenue was going to look like.

And we had actually specifically planned for that and so far for the first half of the year as you saw from our results we’re very much in line with our expectation. If you recall on the first quarter, I mentioned that we see first half revenue to be about one-third and second half be about roughly two-thirds.

And 32% versus 33.3% is exactly where we landed. We also knew at that time that fourth quarter is going to be a bigger quarter for us primarily because of the urgent needs of our customers’ requirements.

And so since then even then since the beginning of the year, or even prior to that, we have ordered raw material, we have built sub assemblies at subcontractors and we’ve been develop in building product and anticipation for these customers urgent needs because they are talking to us specifically about these requirements and their needs and the timing of them.

So in a nutshell, we expected it, we’re on track with that expectation and we believe that we’re ready to execute against that in the second half of the year..

No I mean you did a filing subsequent, I think to the second quarter to reinforce the fact that or rather the first quarter rather that the second quarter was going to be a challenging gross margin. So I understand that.

I just – how should I say, surprised at – I mean this would be a record and then some fourth quarter if one does the math, I mean more than, I don’t know what else to say other than close to half your year is going to be in Q4..

Howard, yes you’re absolutely right about that. We have been aware of that. And we’ve been prepared for this specific situation because of our customers’ urgent needs, and expectations and timing. So although as you know every year our fourth quarter has been the largest quarter.

And from my past five years we’ve also set records in last three years although this year seems to be even bigger than that. But I think the one thing that we’re doing some what differently now and even more is to prepare for these types of customer requirements and needs.

And we believe that all along we’ve been prepared and we’re ready to execute against that..

And then a follow-up question, it sounds as if the international business has clearly grown in share.

Could you provide us with a percentage of how the mix has shifted from domestic to international?.

So Howard, we typically don’t provide on a quarterly basis, details on international and specific customers in general. What I could say that in general, our international business as we’ve said at two or three quarters ago is very promising.

We’ve been executing very well, our customers seem to really, really cling on to our value proposition and benefit and see value in our solutions. And also international customers tend to be about, we believe about a decade behind in adoption the U.S. DoD. So this year – as you remember last year, we had a very, very successful year internationally.

And we also mentioned that we expect successful and a strong year this year for international sales and orders and so far that’s been reflective.

Just to point out in our in our annual filing Howard, in our 10-K we typically breakout international revenue at company level and in the last 10-K we issued, it was in the high 20 percentage range which was a record for the company straight [ph]..

Yes, I was recalling 28% or 29% or so, it just seems. But with this growth in international you’ve been able to still manage your SG&A.

How have you – and as I said I’m just sort of to follow-up on the how have you been able to manage the balance because typically international sales tend to require more selling requirements and more time and other things. So is there anything you’ve been able to do there, Wahid I mean the customers, see what the U.S.

military is doing and they come to you or do you have to go search them out..

Yes, a great point, Howard.

So international customers have some uniqueness to them relative to the domestic customers in some ways for example we are involved directly with some of the customers and other cases we’re also using manufacturer representatives or sales agents that require that they have local relationships they’re set up for those countries.

And certain countries also require that you do business through a local entity. For example, if you know and we have a joint venture partnership in Turkey with a company that we formed that’s called Altoy, which we’ve been working with them. Similarly we announced this quarter in Australia we’re partnering with multiple partners, local partners.

So international customers tend to be somewhat unique on their own and each one is somewhat different from the other. The G&A that you mentioned we typically don’t talk about and disclose G&A to specific regions or customers.

I could tell you that we are well aware of the costs and we believe we’re pretty strong and bullish on our international prospects in general. In general, we always compete with large players as well as the small local players and our win rate is extremely high and remains – it remains high as based on our engagements above these customers.

So we’re optimistic about it, Howard..

Thank you very much, Wahid..

You’re welcome, Howard..

Thank you. Looks we have a follow-up from Josephine Millward from The Benchmark Company. Your line is back open..

Hello, Josephine..

Yes, thank you. Wahid can you talk about your counter UAS offerings, there seems to be very strong DoD interest there.

Are you developing or proposing something based on to Switchblade?.

Josephine, I wish I could comment more on this topic because it is a very exciting category. We have been aware of this for a while and we are actively engaged with customers on developing what we believe very differentiated unique and compelling solutions that could help our customers with them and obviously will proceed with certainty.

So unfortunately, I’m not in a position to be able to discuss the details due to our customers’ wishes..

I understand. I’m going to ask another one for you. Can you comment on FLIR’s recent acquisition of Prox Dynamics’.

Do you think they’re targeting the army to social point sensor with more of what you call Black Hornet?.

So very good question, Josephine. Obviously, no one, others who may not know that FLIR announced this quarter or this month at least a couple weeks ago that they have acquired Prox Dynamics which is what we consider a small competitor, international competitor in the nano category of UAVs.

First, I would like to point out that FLIR is one of multiple vendors for our business for sensors and cameras of that nature. And we have had a strong relationship with FLIR, we’ve already been in communication with them before as well as after this acquisition.

And we believe that we will continue our relationship yet we always have these strategic questions answered internally we address them to make sure we’re not dependent on one particular vendor or supplier.

And in terms of the Nano UAV that you mentioned, we’re very strongly excited about our own offering, and our value proposition, and our solution and our engagement with the customer. You just heard from my remarks we have received an order for 30 snipe systems for early evaluation.

And we are very excited about this product and we are very much willing to compete. And our team, obviously we’ve known Prox Dynamics for long time, we are continuously assessed competitive nature of our business.

And all I could say that we feel fairly confident about our position and our solution offering and our competitive nature despite FLIR’s acquisition..

We might just add that the deal does suggest that there is broad and deep recognition of the value in small UAS and the growth opportunities ahead, not just by us but by other companies in the industry..

That’s helpful. Thank you very much..

Thank you, Josephine..

And it looks we have a question from Austin Bohlig from Piper Jaffray. Your line is back open..

Hey, gentlemen just a quick follow-up for a Raymond more on the modeling concept.

Just wondering if you could help us out on – how would you think about taxes or the tax rate for the next couple of quarters?.

Yes, so our taxes are moving as you’ve seen as we’re near the [indiscernible] we got near the breakeven number. So I think going forward, we will be at a sub statutory level from both the federal and the state perspective. But as we hover around the breakeven level you should see it in the low-digit numbers to teens..

Okay, perfect. Thank you, gentlemen..

And we have a question from the line of Jon Ladewig from Stifel. Your line is open..

Hi, gentlemen. Yes.

One quick question, are we still expecting the 12% of sales for research and development?.

John. Yes, as we have said the beginning of the fiscal year that we have been lowering our incremental R&D investments on strategic initiatives, growth initiatives since beginning of the year and we expect this year to be roughly about 12% of revenue for the full year..

Okay..

[Operator Instructions] I’m seeing no other question is in the queue at this time. So I would like turn the call back over to management for closing comments..

Thanks, very much, Andrew and thank you all for your attention and your ongoing interest in AeroVironment. An archived version of this call, all SEC filings and relevant company and industry news can be found on our website avinc.com. We wish you a joyous holiday season and New Year.

And we look forward to speaking with you again following next quarter’s results. Good afternoon..

Ladies and gentlemen thank you again for your participation in today’s conference. This now concludes the program and you may all disconnect this time. Everyone have a great afternoon..